Europe can’t catch a break these days. Even when the spotlight turns away from the region’s ongoing recession, European stocks have felt the blowback of volatility around the world. That was certainly the case this week, as Germany’s DAX stock index fell 4.2%, a casualty of stimulus-tapering fears in the U.S. and the worsening slowdown in China. Even Germany’s power as Europe’s unofficial economic leader has begun to wane. Is Europe’s leading economy still staying strong for investors in the midst of the EU’s economic drought?
Trouble at home and abroad
Germany’s economy revolves around exports. Favorable trade advantages and the country’s manufacturing power have kept Europe’s top economy out of the recessionary climate that has engulfed Europe. In fact, Germany’s reliance on exports is even more significant than some of the leading export-heavy nations in the world. The country exported nearly $1.5 trillion worth of goods last year, according to the CIA World Factbook — just $200 billion less than the U.S. and $500 billion less than China, two nations with much larger GDPs. Among the top 10 largest economies, Germany exercised the largest export-to-GDP ratio in 2012.
China’s manufacturing decline and credit crunch are thus a serious worry for Germany’s continued economic strength. Outside of other European nations, China is Germany’s second-largest export partner behind only the U.S. — Germany racked up 67 billion euros’ worth of exports to the world’s second-largest economy in 2012. If demand for goods in China slips — and that’s certainly a possibility, given manufacturing’s contraction across the Pacific and the flow of cash away from China — the crunch will threaten Germany’s export economy. The EU’s war of words with China over trade and dumping will only exacerbate that problem unless the two sides can calm down.
Germany’s position in the EU isn’t helping, either. Harder-hit nations such as Italy and Spain still begrudge Germany and its heavy-handed, austerity-imposing response to the recession. Now Turkey has joined the chorus of distraught European nations: The country’s ongoing protests and riots, as well as Turkish-German diplomatic relations, are souring fast. Germany reportedly blocked EU talks involving Turkey’s membership bid on Thursday, and if this row intensifies, Germany’s standing in its own backyard will continue to worsen.
This all adds up to a risky bet for the German economy, which hangs on to growth by a thread. Leading German manufacturers are also in danger while exports are at risk. Siemens AG (ADR)(NYSE:SI)‘s stock plunged more than 5% this week, as the global conglomerate’s own Chinese business risks falling on the nation’s downturn. Just a few years ago, Siemens AG (ADR)(NYSE:SI)’s Chinese prospects were soaring, helped by the country’s mass urbanization and need for manufactured goods and electronics. Now, however, the company’s CEO says he sees “no momentum” from China, and the company has cut its sales outlook for this year. That’s a bad omen for Germany from a diversified company often seen as a bellwether of the nation’s economy.